Hollywood’s Year In China: Frustrations, Flimflam – And A New Hope For 2016

It’s been a strange year for Hollywood in China, with triumphs and frustrations in the booming market that’s set to supplant the U.S. as the No. 1 box office territory as early as 2017. What this next year holds is to a degree anyone’s guess since the powers that be in the Middle Kingdom are known to move the goalposts at a whim. But Hollywood certainly would like to see some concrete change that would curtail the “shenanigans” and “tricks” that increased this year. A key wishlist item is an entity with the power to release films and compete with state-run China Film Group. However, it might take waiting out 2016 before seeing any major shifts.

A look back at the past year shows mega-success for such Hollywood tentpoles as Furious 7 ($391M in China), Jurassic World ($229M), Avengers: Age Of Ultron ($240M), and Mission: Impossible – Rogue Nation ($137M). The eight studio films that topped $100M tallied roughly $1.44B versus 2014’s five movies over the century mark, which equaled about $781M. Growth of 84% is not chump change, and the studios recoup $360M of this year’s number.

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But here’s the rub. When Furious 7 snatched the territory’s all-time biggest box office crown in April and Jurassic World legged out to nearly the same heights as Ultron in June, the local market went into what one Western exec termed “a panic”: Hollywood films were succeeding at a breakneck pace, while China had not had a movie of its own cross $150M since February. The traditional — and unofficial — summer blackout period was extended by several weeks to allow local fare to flourish and Hollywood to sit on the sidelines longer than in the past.

That resulted in the summer successes of Pancake Man and Monkey King: Hero Is Back. Then there was Monster Hunt, which was left in cinemas for about 60 days versus the 30 that Hollywood movies are allowed, and beat F7’s record on Day 58.

In the wake of that, it was reported that screenings of Monster Hunt, as it limped to the finish line, were, as one person tells me, taking place every 15 minutes while empty but “sold out.” The ticket fraud issue was raised. Producer Edko Pictures admitted to giving away $6.2M worth of tickets for “public welfare screenings” near the end of the film’s run and acknowledged there were overnight and duplicate screenings but said it was instituting “serious criticism” to those involved on the ground level, according to multiple reports.

Around the time this was happening, reports were swirling about a similar situation whereby propaganda film The Hundred Regiments Offensive was seeing its box office falsely goosed. It’s been said that people buying tickets for Terminator: Genisys were sold tickets to the local title so that the coin would go into its coffers, but write-ins allowed moviegoers to instead see the film they initially sought. This is believed to have resulted in a loss of more than $10M to Paramount. (Overall, under-reporting by exhibitors is believed to be anywhere from 10%-40%.) The studio never commented on the affair, and who could blame it? The movie made more in China ($113M) than it did domestically ($90M), and up next was its Mission: Impossible – Rogue Nation (with investment from China’s Alibaba).

But even with Rogue Nation, says a watcher, the Chinese authorities “drove the dagger home” and double- and triple-dated Hollywood films in the fall: Rogue Nation, Pixels, Minions and others in September — along with local smashes Lost In Hong Kong and Goodbye Mr Loser — and Everest, Maze Runner: The Scorch Trials and The Peanuts Movie in November as the December blackout loomed.

What’s more, many of those were dated on a Sunday or during midweek in what’s become a much more frequent strategy of China’s that sees far fewer Hollywood films secure a Friday bow. “They’re killing them before they get to the weekend,” an executive laments. It’s telling that in my year-end story from late 2013, an exec told me, “We have to hope and pray they have big movies” because Chinese officials then feel more comfortable allowing Hollywood product in. “We need them to have another $200M monster hit.” Otherwise, they’ll “start to date our movies against each other.”

Ultimately, China-made movies had 60% market share through the end of November with box office up 48% to a record $6.25B. The Chinese “just got incredibly greedy this year; they didn’t have to pull stunts and tricks,” says one source. Another says, “We’ll never get over 50% market share again.”

It’s not so hard to understand in the context of other international markets that China wouldn’t want to be dominated by “American hegemony” (to borrow a favorite term of the French). One exec agrees, “In principal, French producers don’t want it, Italian producers don’t want it, German producers don’t want it.” But the transparency with which the market is manipulated nevertheless is fascinating to watch.

State authorities have said they were going to crack down on box office cheats. But one watcher says, “I don’t think they care how bad this looks,” noting it’s “pathetic” these practices should be perpetrated under the watch of a state-run body.

China Film Group, through which all offshore films are funneled, the wisdom goes, believes it is running a business but conversely has a monopoly. At the same time, CFG needs Hollywood films since they still generate an awful lot of money. The state media authority, SAPPRFT, I’ve heard, essentially tells CFG how much money it has to make, and that turns the industry into a managed economy. The goal each year has been to increase overall box office by 30%, and that has been the case steadily — until China blew past it this year. That growth is astonishing, all agree. One U.S. exec echoes a common sentiment, “They’re screwing us over, but they’re doing it well.”

Magically fluctuating screen counts also have been an issue. Spectre opened big in November, then lost 72% of its plays by Frame 2. The Martian also lost screens — and it has a plot element that paints the Chinese as saviors. Neither film made it to $100M. What’s more, The Martian also saw one of its later frames dented when China made way for 35,000 showings of local movie Surprise – Journey To The West on what originally was tipped as a preview weekend. Alcon/DMG/Warners’ Point Break, which had successfully experimented with an early Middle Kingdom release strategy, also was adversely affected.

One thing that will change in 2016 is that studios will be able to avail themselves of the ability to audit cinemas under what’s known as the longform agreement between China and Hollywood. This was born of the memorandum of understanding that was signed between the nations in February 2012 and which saw the expansion of the quota limit to 34 movies along with a hike in the revenue share to 25% for the studios.

But some are skeptical. “The idea of auditing sounds good on paper, but materially, I don’t think it’s going to change anything,” one source says. “We see it all the time. You can audit theaters, but unless you’re there in person and seeing them skimming tickets, there’s no way you’re going to audit them. There are thousands of theaters, but they’re not all big chains — there are a lot of mom-and-pop shops, especially in the second-, third- and fourth-tier cities. Good luck. It’s good political cover. It makes it look like they accomplished something, but it’s not going to do anything.”

Another says they’re not sure anyone will even exercise the right to audit, warning, “You dare at your peril.” What’s more likely to happen is that the MPAA’s member companies might do a batch audit of several titles once all have the experience of releasing a movie this year and if they feel there are issues to uncover. Important to remember here is that China Film Group also has the right to trigger the audit clause and look at local movies too, which would behoove it.

The first film that will fall under this updated agreement, which also aims to ensure timely payment, is Star Wars: The Force Awakens. The global juggernaut’s release will be an interesting experiment. Disney has laid on the marketing thick and just premiered the film on Sunday in Shanghai. Savvily using Lu Han — the Middle Kingdom’s answer to Justin Bieber — as the film’s official ambassador, there were more than 700K mentions of the film on social media in the first three weeks of December. Disney is pumping a lot of effort into China with a theme park and resort to open in 2016 (with Star Warsattractions, natch). State-owned Shanghai Shendi Group also owns a stake in that enterprise and has every interest in seeing it succeed.

The Chinese government owns 57% of that theme park, opines an exec with dealings in both Hollywood and China, “so if they’re purely thinking about themselves, they want the movie to help market and promote the opening of the theme park.” Still, the film “could be the tipping point,” this person suggests. “Are we going to see them meddle with results or let it make the money it should make?”

The key shift that executives I spoke with are after is to see another, private group, given a license to distribute on the mainland. “This market really won’t change until there’s a real competitor for CFG that has a real distribution license,” says one.

When the likes of Bono or Huayi or Alibaba are allowed to bring movies in that count toward the quota and thus are revenue-share titles that can be marketed outside CFG, then it changes. But not before.

Under the terms of the WTO, entities are eligible to apply for a license. But scuttlebutt on the ground is that folks who’ve entertained the idea have been met with suggestions that it’s not the right time.

So, does Hollywood have any leverage in the situation? For right now, not so much. With the massive growth in the market — even if some grosses haven’t been as consistent this year — Hollywood can’t afford to just turn its back on China. And it’s already heavily invested.

Along with the myriad deals between Hollywood and China (Jeff Robinov’s Studio 8, Bob Simonds’ STX), studios are increasingly putting a footprint within the Middle Kingdom. Universal has a Beijing office run by Jo Yan, and Warner Bros is sending veteran Richard Fox to oversee expansion and run its joint venture with China Media Capital.

The best bet is for local companies to begin to lobby/pressure the government to open up the market. That could pave the way for studios to be given a longer lead time on their release dates. Right now, they generally are confirmed about 30 days out. That in turn gives them a much shorter window to advertise and get talent to the market.

“Eventually, we want to have our own distribution companies in China,” a studio exec muses. “Whether we ever get them is almost impossible to say and not in the short term.” And there is no “silver bullet.”

Another exec adds, “The best thing Hollywood can do is try to understand the Chinese point of view and what the agenda is and take out good will or morality that people think should be counted in.”

Says one Chinese producer: “Domestic movies will always be helped by SAPPRFT. Also, domestic movies have content more relevant to locals. So Hollywood studios need to work more on co-productions to make their content more relevant to China and bypass the quota so a release date can be self-controlled.”

The first official U.S./China co-production, Kung Fu Panda 3, releases on January 29. Jeffrey Katzenberg has been building China ties for several years, and Oriental DreamWorks should see great success with this title, which has a slot going into the Lunar New Year blackout period. Other films there are Crouching Tiger, Hidden Dragon: Sword Of Destiny from the Weinstein Company and Pegasus Taihe Entertainment along with CFG. It hits mainland theaters on February 8. But according to China Daily, six films are to be released in that frame including The Man From Macau III, fantasy action drama The Monkey King 2 and the animated comedy Mr Nian.

So, when someone says categorically, “It doesn’t change next year,” there appears to be credence to that. Indeed, 2016 is looking like a wait-and-see game before a new U.S.-China contract is to be negotiated in 2017. Under a new deal, it’s possible that the quota goes up, and the hope in Hollywood is that a new entity has the chance to release those films.